Globalization and its Discontents | Study Guide

Joseph Stiglitz

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Globalization and its Discontents | Chapter 3 : Freedom to Choose? | Summary

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Summary

The liberalization policies the IMF imposes on debtor nations rarely, if ever, take into account information about a nation's needs and wants. Washington Consensus principles are imposed without thought given to a developing country's present economic conditions.

The IMF often demands that services provided by a developing nation's government be taken over by a private, for-profit enterprise without learning whether or not this will work. For example, a government-run program in Morocco that provided women with chicks to raise and chickens to sell was closed down without first consulting the government. When a private enterprise took over the service, it refused to replace those purchased chicks that died as the government had done. The poor people who depended on the chicks for income could not afford to pay for new chicks to replace the deceased. They stopped buying chicks from the company, which quickly went out of business. The women who depended on selling their chickens could no longer depend on this source of income. The collapse of these privatized businesses reveals the IMF's refusal to consider how economic changes should be sequenced and timed. Had the IMF seen to it that a company responsive to citizens' needs was in place before it shut down the government program, the transition to privatization might have worked. But the IMF believes the market always works perfectly, that where there's demand a perfect supply source will miraculously appear. However, this is rarely the case.

In Morocco, a traditional means of earning a living disappeared because the IMF would not permit government involvement and never asked the government why its program was better than a privatized one. This reflects another core belief of the IMF, "trickle-down economics," which states that government is always the problem and for-profit business is always the solution. This is just one instance in which the IMF assumed that "markets arise quickly to meet every need" whereas "many government activities arise because markets have failed to provide essential services." The IMF often pushed for rapid privatization even when doing so created a monopoly in service provision. Thus, free-market competition, a key tenet of liberalization, was obliterated. In other instances the pursuit of profits that fuels privatization may lead to job losses, as when a private company fires workers to boost its profits. In nations with no unemployment insurance or other safety nets, the effect on families and the economy as a whole can be devastating. Foreign direct investment in a developing nation can have positive effects and create jobs. But too often the multinational corporation "drives out the local competition [and] uses its monopoly power to raise prices" beyond what poor citizens can afford. The multinational corporation also quashes "the ambitions of the small businessmen who had hoped to develop homegrown industry." The effect can be likened to what happens in the United States when a Walmart opens in a small town and local, family-owned businesses are forced to close because they are unable to compete.

Developing nations that are forced by the IMF to open their economies to free trade often suffer the consequences of Washington Consensus bias and inequity that hurt the developing nations but benefit the rich. This is especially true for agricultural products. Most industrialized countries subsidize agriculture, making it possible for farmers or agribusinesses to sell their crops at a low (often below-cost) price and still make a profit. When these subsidized crops are forced on developing nations through free trade, poor nations' farmers cannot make a profit because, lacking subsidies, they must charge more than the Western imports. Add trade barriers, such as tariffs, imposed by Western countries on foreign agricultural imports and the result is a skewed and unequal trade regime. After eliminating trade barriers and opening their markets to imports, many developing countries find that their economies decline rather than grow. These nations recognize the hypocrisy in this free-trade double standard. Understandably, "developing countries get ... angry over this sort of double standard because of the long history" carried over from the colonial period into the era of globalization. The liberalization of capital markets, such as banks, removes financial control from the developing nation's government and makes the nation vulnerable to destructive speculative investments in the value of its currency. The influx of speculative "hot money" into a developing country raises interest rates, making it difficult for farmers and other citizens to secure or repay loans. This harms the important agricultural sector and squelches domestic entrepreneurship that would generate job growth.

Its lack of attention to local conditions, as well as the sequence and pacing of change, makes the IMF an agent of national instability rather than stability. Some nations are strong enough to oppose IMF strictures, as when Uganda maintained its free public elementary educational system despite IMF demands that the government cut its budget by charging fees for education. Social unrest often arises in developing nations where IMF rules are adopted. In some nations in the Middle East, the IMF prescribed severe cutbacks in food subsidies to consumers, an austerity measure intended to reduce government expenditures. The poor citizens in Middle Eastern countries started food riots that sometimes led to the overthrow of the government. Such extreme instability wreaks havoc on any economy and is especially devastating for developing ones. When the IMF tried to get King Hussein of Jordan to abolish food subsidies, the king refused to do so because he understood his people's needs. Yet, the IMF is wedded to the notion that keeping a populace hungry in order to shrink the size of government is good policy. It dictates similarly harsh policies in most debtor countries, with social and political instability resulting in Africa and Latin America. Stiglitz believes the IMF would do better to establish a policy of land reform and other poverty-reduction programs to maintain the stability of developing nations and help them grow their economies.

Analysis

Because it is in thrall to the Washington Consensus and views these principles as sacrosanct, the IMF ignores local conditions in debtor nations and imposes austerity measures that often result in social and political instability. A foundational tenet of Washington Consensus ideology is that governments are always inefficient and harmful and private enterprise is always effective and beneficial. The IMF's anti-government policies mean that it hardly ever consults with a developing nation's government to learn about local traditions and conditions. This deliberate oversight often leads to economic disruptions that hurt citizens and the economy and may lead to social instability. The IMF frequently forces governments to stop providing essential services so that private companies can take over. However, because timing is almost never taken into account, a government service may be eliminated before a private company is in place to provide it. For example, in Côte d' Ivoire, the telephone company was privatized before the market was adequately regulated or a competitive framework set up. The private company gained control of the market, and many people were not able to afford cellular phones or Internet service. In such cases, the citizens who depended on the government service are simply out of luck. The IMF believes that it is more "important to privatize quickly; one can deal with the issues of competition and regulation later." Privatization, if done right, can have positive effects on a developing economy but too often the drive to maximize profits prices the company's goods or services beyond the reach of ordinary citizens. Profit-seeking may impel the private company to eliminate jobs, which not only hurts individuals and families but may have ripple effects throughout the economy and hinder economic growth.

Any benefits that might accrue to a developing nation through foreign direct investment or privatization are sometimes undermined by corruption. The IMF's view that "it is far more important to privatize quickly" may actually encourage corruption, or "crony capitalism." In the rush to comply with the IMF, corrupt government officials may give privatization contracts to friends or relatives who pay them kickbacks. Companies or multinational corporations that seek to privatize a formerly government-run program all too often pay bribes to government officials to get the lucrative contracts. Governments that were corrupt before privatization experience a huge windfall once privatization is mandated. Corruption not only puts money in the pockets of corrupt government officials, but it also encourages business owners and bureaucrats to skim assets from the private enterprise instead of using profits to expand the industry and grow the economy.

Privatization often requires the entry of foreign firms into the developing country. Foreign direct investment can be beneficial, but it may also present the same problems as ineffectively imposed privatization. When multinational corporations open for business in developing nations they too often destroy competition from small, domestic businesses, and thus hinder homegrown industrial and economic growth. In this situation, a multinational corporation may quickly become a monopoly, firing workers and raising prices to maximize profits. These actions are good for the corporation but terrible for the nation's citizens. In the financial sector, foreign-owned banks may stop giving loans to fledgling domestic companies and lend only to multinational corporations. Thus, domestic economic development is halted because credit is denied to traditional domestic businesses. Another problem with foreign direct investment is the incentives a multinational corporation may demand as a condition of doing business in the developing country. Regulatory rollbacks, huge tax breaks, permits to strip assets and natural resources for the sole benefit of the company, environmental deregulation, and moving profits to the multinational corporation's home country instead of reinvesting them in the host country are just a few of the drawbacks that may occur with foreign direct investment.

Absolute faith in the perfect functioning of the free market blinds the IMF to the need for planning, or sequencing, economic changes. In the real world, such perfection does not exist. Privatization and foreign direct investment must be conducted with forethought for their effects on a developing nation and its people. For this and other reasons, foreign intrusion in a developing economy must be planned in advance and sequenced for the benefit of the nation's citizens. This means that job-creation policies must be in place before a multinational corporation moves in and fires workers to glean greater profits. It means that the government must put in place regulations and laws that oversee and guide the functioning of multinational corporations for the benefit of the citizenry. In the sequencing of development projects, the government must be involved because it is almost always the best source of information regarding local conditions. The problem is that the IMF shuns government input and encourages foreign involvement without consultation and planning.

Trade liberalization, or open free markets, is a common conditionality imposed on borrowing nations. Unfortunately, it often reveals the hypocrisy, inequity, and bias of the IMF and other global trade institutions. The IMF may demand that before a loan is paid the developing nation eliminate barriers to trade, such as tariffs that would otherwise be imposed on imports of domestically imported goods. However, the IMF tolerates these same practices in Western developed nations. The implementation of the IMF's free-market policies is hypocritical because it lives by the absolute good of free markets—for every nation—but demands compliance from developing nations while permitting flouting of the rules by developed nations. Clearly, this double standard fosters inequity among nations and reveals the IMF's innate bias. The result is that the developing nation is forced to import subsidized goods, mainly agricultural products, priced far below domestic products. Local farmers cannot compete with the low price of imports and may have to quit farming. Also, developing nations suffer from tariffs placed on their exports by rich industrialized nations that seek to protect their domestic industries. So there is a clear double standard that harms the developing economy in both imports/domestic industries and exports/imposed tariffs.

The liberalization of financial markets can wreak havoc with a developing nation's interest rates and the value of its currency. Foreign banks often benefit, but little or no benefit accrues to the developing nation. A large influx of foreign money into domestic banks may artificially raise interest rates (to 50 or even 100 percent) and make loans out of reach to the developing nation's farmers and business owners. Speculating on the value of a developing nation's currency has even more dire consequences. The devastating global effects of liberalized financial markets are discussed in detail in the next chapter on the East Asia crisis.

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